Associated Photographers, Inc. v. Aetna Cas. & Sur. Co., 81-1797
| Decision Date | 12 May 1982 |
| Docket Number | No. 81-1797,81-1797 |
| Citation | 677 F.2d 1251 |
| Parties | ASSOCIATED PHOTOGRAPHERS, INC., Appellant, v. AETNA CASUALTY & SURETY COMPANY, an Insurance Corporation, Appellee. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Paul H. Niewald, Stephen S. Brown, Niewald, Risjord & Waldeck, Kansas City, Mo., for appellant.
Linde, Thomson, Fairchild, Langworthy, Kohn & Van Dyke, P. C., R. Frederick Walters, Kansas City, Mo., for appellee.
Before LAY, Chief Judge, STEPHENSON, * Circuit Judge, and OVERTON, ** District Judge.
Plaintiff-appellant Associated Photographers, Inc. (Associated) appeals from a jury verdict awarding it $160,808.99 for business interruption loss and $204,001.03 for property damage on its insurance contract with Aetna Casualty & Surety Company (Aetna). The district court 1 entered a directed verdict for Aetna on Associated's claim for damages for the independent tort of bad faith refusal to pay and on Associated's claim for statutory penalties for vexatious refusal to pay. Associated argues that the court incorrectly instructed the jury on the method of calculating the business interruption loss and incorrectly excluded evidence of different types of business interruption policies. Additionally, Associated claims that the court erred in directing a verdict on its claim for the independent tort of bad faith. 2 We affirm the district court.
Associated is a corporation engaged in the business of producing photographic prints from film submitted to it by professional photographers. The primary source of its business is the processing of class and individual school pictures for students from elementary schools through colleges. The heaviest season of the school picture processing business is in the fall from Labor Day until Christmas. The spring season is from February through April and its volume of business is greater than the summer and winter seasons but less than the fall season. Timely delivery by Associated is an important part of the processing business because the photographers have deadlines imposed upon them by the schools.
On September 29, 1977, at approximately 4:30 p. m. an employee accidentally started a fire in the spray booth used to apply lacquer to the photographs. Although the fire was confined to the lacquer booth, smoke from the fire spread throughout the building. After the fire was extinguished, the employees re-entered the building and noticed that a residue from the smoke covered most of the surfaces in the plant, including the electronic printers. The employees immediately began cleaning up the building and the electronic printers. The 35 mm electronic printers were back in operation the next day and the 70 mm electronic printers were operating within a week. By October 21, 1977, the lacquer spray booth was back in full operation.
Although the printers were operating, they were operating erratically which caused unacceptable prints or rejects. The parties disagree as to the length of time Associated's business was interrupted due to fire-related printer problems. Aetna contends that by December 1, 1977, the company was operating normally. Associated argues that its problems continued until the spring and early summer of 1978. Thus, the parties differ approximately seven months as to the length of the suspension period. The parties were unable to agree upon the amount due Associated on its contract of insurance with Aetna. On October 19, 1978, Associated filed a complaint against Aetna. In Count I, Associated claimed damages for business interruption and vexatious refusal to pay the business interruption damages. In Count II, Associated sought damages for physical damage to property as a result of the fire as well as for vexatious refusal to pay. Count III included Associated's damages claim based on the independent tort of bad faith refusal to pay.
The jury trial of the case began on April 27, 1981. The verdict for Associated was returned on May 11, 1981. The jury awarded Associated $160,808.99 on Count I and $204,001.03 on Count II. The district court directed a verdict for Aetna on the vexatious refusal to pay claims of Count I and Count II and on the Count III tort claim.
Associated had purchased and was covered by business interruption insurance from Aetna. The purpose of business interruption insurance is "to protect the prospective earnings of the insured business only to the extent that they would have been earned if no interruption had occurred * * *." National Union Fire Ins. Co. v. Anderson-Prichard Oil Corp., 141 F.2d 443, 445 (10th Cir. 1944). The basic objective of a business is to realize earnings and business interruption insurance recognizes and protects an insurable interest in a business' earnings. Northwestern States Portland Cement Co. v. Hartford Fire Insurance Co., 360 F.2d 531, 534 (8th Cir. 1966).
Associated argues that the instruction indicating the method of calculating the business interruption loss, instruction 10, is not in accord with the language of its insurance policy. A related argument advanced by Associated is that the court erred by not giving Associated's two proffered instructions which accurately set forth the compensation it was entitled to receive according to the insurance policy's language.
The pertinent portion of the insurance policy provides:
2. The Company shall be liable for:
a. the actual loss sustained by the insured resulting directly from necessary interruption of business, but not exceeding the reduction in gross earnings less charges and expenses which do not necessarily continue during the interruption of business, for only such length of time as would be required with the exercise of due diligence and dispatch to rebuild, repair or replace such part of the property herein described as has been damaged or destroyed commencing with the date of such damage or destruction and not limited by the date of expiration of this policy. Due consideration shall be given to the continuation of normal charges and expenses, including payroll expense, to the extent necessary to resume operations of the insured with the same quality of service which existed immediately preceding the loss * * *.
5. Definitions:
a. For the purposes of this insurance, "gross earnings" are defined as the sum of:
less the cost of:
(4) raw stock from which such production is derived, and
(5) supplies consisting of materials consumed directly in the conversion of such raw stock into finished stock or in supplying the services sold by the insured, and
(6) merchandise sold, including packaging materials therefor, and
(7) services purchased from outsiders (not employees of the insured) for resale which do not continue under contract.
No other costs shall be deducted in determining gross earnings.
In determining gross earnings, due consideration shall be given to the experience of the business before the date of damage or destruction and the probable experience thereafter had no loss occurred.
The trial court correctly refused to give Associated's proposed instructions B 3 and C 4 because they erroneously state the measure of damages under the contract of insurance. Associated argued and both proposed instructions state that Associated's recovery is limited only by its loss of gross earnings. These instructions ignore the language of the insurance policy clearly limiting Associated's recovery to the "reduction in gross earnings less charges and expenses which do not necessarily continue during the interruption of the business * * *." Since both proposed instructions omit the required deduction of noncontinuing expenses, Associated's instructions do not conform to the policy language. 5
Associated's argument that the court erred in using the net profit formula of instruction 10 is also without merit. Instruction 10 provides:
You are instructed that under the insurance policy defendant agreed to protect the earnings which the plaintiff would have enjoyed had there been no interruption of business as a direct result of the fire and to reimburse plaintiff for expenses incurred by it in reducing its loss of earnings.
On Count I, if you find plaintiff suffered a loss due to interruption of business as a direct result of the fire, you should award plaintiff for the actual loss of earnings you believe it sustained as a direct result of the fire (business interruption) plus any expenses plaintiff incurred, if any, in reducing its loss of earnings unless you believe plaintiff is not entitled to recover by reason of Instruction No. 12. 6
You are instructed that actual loss of earnings means the difference between the net profit you find plaintiff would have earned during the period of interruption and the net profit you find plaintiff did earn during the period of interruption.
The following calculations, using figures from one of Aetna's exhibits (based on a two month suspension period), demonstrate that the instruction formula of difference between the projected net profit and the actual net profit is here equivalent to the policy language of reduction of gross earnings minus noncontinuing expenses.
No Fire Fire
(projected) (actual) Difference
----------- ------- ----------
Gross Earnings 606,456 501,757 104,699 (reduction
in gross
earnings)
Expenses 383,663 305,941 77,722 (noncontinuing
expenses)
Net Profit 222,793 195,816 26,977 (business
interruption
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